7 Fascinating Facts About How US Presidents Affect The Stock Markets

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It's still an election year and the presidential campaign rages on.

Everyone is making a lot of noise about how election years tend to be good ones for stocks.

However, historically, every year of the 4-year presidential cycle tends to be a good one for stocks.

Are these correlations totally spurious?

"No," argue many experts. Goldman Sachs' Jose Ursua, Professor Robert Prechter, and S&P Capital IQ's Sam Stovall are among the voices that note that election cycles have major economic and behavioral implications for the stock markets.

We cobbled together everything we know about the connection between stocks and presidents. Maybe, you'll find it to be a useful guide to the stock market and perhaps even the election.

The 3rd year of a President's term is usually the best for stocks

Citi Investment Research & Analysis

On average, the third year of a presidency is by far the best year for stocks. That's not to say it's always the best year. "However, as can be remembered vividly, this approach did not work at all in 2008," warns Citi's Tobias Levkovich.

Source: Citigroup

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Volatility spikes in the 2nd year, then levels off

GS Global ECS Research

From Goldman Sachs' Jose Ursua: "Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle."

Since 1900, only 5 presidents have seen stocks rise more than 50% during their term

When stocks rise significantly during a presidential term, the incumbent usually wins re-election in a landslide

From Robert Prechter: "[W]e deem an election a landslide victory if the incumbent competed for and won re-election by defeating the nearest competitor with an electoral vote margin of 40% or greater...We define a large positive stock market change as a net gain of 20% or more in the preceding three-year period...We conclude that a large net positive stock market change during the three years prior to the election is highly likely to be associated with a landslide victory for the incumbent as opposed to a landslide loss."

Source: Robert Prechter

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You can figure out who will be president based on the 3-month stock market performance preceding an election

From S&P Capital IQ's Sam Stovall: "An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956)."

Source: Stovall's Sector Watch

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Lately, President Obama's approval rating has been tightly correlated with stocks